Insurance markets in everything, getting caught edition

"My favourite ticketing system was in Mumbai, India," Kim enthuses. "No one actually buys a ticket, but you can buy ‘ticket insurance’ from private entrepreneurs who work at the entrance of the station.  The ‘ticket insurance’ is about half the price of a regular rail ticket.  It gives you a guarantee that, in the extraordinary event that you are booked by a railways inspector for taking a free ride, your fine will be paid.  A relative was once booked and the ticket insurer paid the fine exactly as promised."

Here is the link, and thanks to Brendan Leary for the pointer.


that is awesome...the problem would be if they assess 'points' against you (like we do with driver's licenses); this guy can't take your points away...


From your comment, I guess you haven't really heard of the Mumbai rush hour trains. :)
Have a look :


Theory without regard to reality is useless, and I am sorry to say, your post is a classic example! Have you heard or seen how densely packed the Mumbai trains are?! (See the previous link for example) Do you still think it is "irrational" for the people to buy this insurance instead of the actual ticket when the chance of a railway inspector being able to walk through this maze of people and actually have time to check everyone's tickets are really, really, really miniscule? The people are making a perfectly rational choice.

All insurance is "irrational" in the sense that unless the cost of the insured event will break you you're better off self insuring.
I remain surprised that the train company hasn't figured out a way to more effectively charge for a ticket. If the insurance on a fine is half the price of a ticket than the odds of them paying are probably less than 5-10% (capital is likely fairly expensive in that business and it's unlevered). Their cost of capital is low enough (and borrowing isn't that hard in India anymore.
The crowds would cut down (boosting safety records) and the train operator would make money.

This sort of arrangement is a very rational and effective way of charging fares if people have any integrity. When the local commuter train in Silicon Valley, California went to this system a couple of years back there was no detectable loss of revenue at all. None.

Buying insurance is irrational once you've decided that you plan to pilfer ridership, unless the fine is an insurable amount, meaning that it drives you out of the risk neutral part of your utility curve.

David, your opportunity [where the conductor gives a confessor a small kickback] doesn't work or doesn't work well enough to kill the insurance market because the conductor doesn't capture enough of the fine to give you a big enough kickback to make it worth your while. This isn't the sort of country where civil servants get performance-based raises. Note that passengers who buy insurance prefer having insurance to going bare, and have a small incentive to keep the insurance market healthy.

The railroad could kill the insurers by institutionalizing confessions to the conductor. If you do that, you pay the fine and get a receipt from the court for having paid the fine which you turn in to the insurance company -- and then you get half of the fine back in the mail a few weeks later.

People who correctly decide that insurance is a bad buy can get a nice piece of change by turning vigalante, and even people who like insurance may rat out their own insurer because of the free rider problem. The insurance folks can fight back a little by refusing to pay a particular client more than, say, five times, but that's hard to deal with in a country like that and the fines are likely to be big enough that even a few acts of vigilantism are worth doing.


I remember from my Bombay days that people who travel longer than 30-40 minutes choose places away from the doors and read or play cards. Some commute from Poone and it takes about 3 hours and some fathers do not see their children except during weekends. D.D. Kosambi is to commute from Poone and it is rumoured that some of his books were written on those trains.

Mumbai insurance appeared earlier in some of these blogs.

In Rome people dont pay and they dont even need insurance.

Clearly the railroad isn't fining people enough for travelling without a ticket, or ... they don't check often enough. The theory here is that people should find it cheaper on average to buy the ticket. But as my Mumbai friend says "prob. you get caught 1 off 5 times ... and the fine is 1.5 times the ticket cost".

"Whos says the train company is not very happy with the current system? They probably get a serious fraction of their revenue from the fines, and the insurance system makes sure people won't argue when caught."

It may be, too, that this is a sort of useful price discrimination -- those who can afford full-price tickets, pay full price to avoid the hassle of being caught and fined. Those too poor to pay full price, go the insurance route, and the train company gets maybe half price from those riders.

I am sure this is a made up story. I lived in Bombay (now Mumbai) for 6 years and took the local (that's how suburban trains are called there) almost everyday. Checking for tickets was routine and lines at the ticket counters were long in the stations I frequented.

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